BoE keeps rates steady, more QE still possible

Britain's central bank left interest rates at a record low 0.5 percent for the 30th straight month on Thursday, leaving open the possibility that it may restart its quantitative easing program should the economy weaken further.

The Bank of England issued no statement with its decision, and it will be two weeks before minutes to the decision reveal whether any other policymakers joined long-standing dove Adam Posen in calling for more asset purchases.

But at the very least, economists expect there to have been a more active discussion of options for injecting more stimulus into the economy, as conditions weaken sharply in the United States and euro zone and financial markets remain turbulent.

We think one or two additional members of the committee will have joined Adam Posen in calling for further quantitative easing -- and it won't be long before we see further QE announced, said Carl Astorri, an economist at Coutts.

In recent days a growing number have shifted their view and see much greater chance of further easing in the months to come.

We expect next month to be different, said Investec Philip Shaw. We have changed our view of the policy outlook and now expect the MPC to provide the economy with additional stimulus via another round of QE, he said.

Sterling strengthened and gilt futures pared gains after the BoE's decision eliminated the outside possibility that the it might have started a new round of QE as soon as this month.

All 60 economists polled by Reuters had forecast no change in rates, but a recent run of poor data has underpinned speculation in markets that the BoE may eventually embark on a second round of quantitative easing.

Purchasing managers' surveys show the manufacturing sector, once the bright spot in Britain's lackluster recovery, has been contracting for the last two months, while an equivalent survey of services firms recorded its biggest fall in a decade, denting expectations for a strong rebound in growth in the third quarter after nine months of virtual stagnation.

However, policymakers may be reluctant to restart their asset purchase program with inflation still running at more than double the BoE's 2 percent target. Moreover, it is not clear whether buying more British government bonds would be an effective tool, as yields on most securities are already close to all-time lows.

British interest rates have stood at 0.5 percent for more than two years, the longest period of policy inertia since World War Two, and money markets are not pricing in any tightening until well into 2013.

The BoE completed its first round of quantitative easing in February 2010, having bought 200 billion pounds ($319 billion) of assets, mainly British government bonds.

Earlier on Thursday the Organization for Economic Cooperation and Development (OECD) said central banks in advanced economies should loosen policy if economic weakness persisted, but stopped short of calling for immediate loosening. ($1 = 0.627 British Pounds)

(Reporting by David Milliken and Fiona Shaikh; Editing by Hugh Lawson)